Will Sanctuary Cities Suffer?
Market Commentary
March 2017
ONE OF PRESIDENT TRUMP’S RECENT EXECUTIVE ORDERS GRABBED THE ATTENTION
of municipal investors. The order directs federal agencies to remove
undocumented immigrants who, among other criteria, have been convicted
of crimes, engaged in fraud or are subject to a final order of removal. It
contains a provision to strip federal funding from state and local governments
that do not comply with federal immigration law, a group dubbed “sanctuary
cities.” We don’t believe this provision will pose a challenge to these cities.
Ability to Restrict Federal Funds Is Limited
President Trump’s executive order directs federal agencies to “Ensure that jurisdictions
that fail to comply with applicable federal law do not receive federal funds, except as
mandated by law.” The passage except as mandated by law is critical, because the vast
majority of federal revenue that flows to U.S. cities is due to laws enacted by Congress
that provide federal funding for a mandate related to transportation, housing, health
and safety, etc. Absent changes to the myriad laws authorizing federal funding of these
assorted mandates, there is very little risk that the Executive Branch could materially
alter the flow of federal dollars to U.S. cities.
Shawn P. O’Leary
Senior Vice President,
Senior Research Analyst
Nuveen Asset Management, LLC
U.S. Cities Do Not Rely on Federal Funding
The precise mix of revenues used to finance government operations varies from city
to city. However, revenues are typically funded primarily from local sources, such
as property and sales taxes, fees and other local charges. Cities also receive funding
from county, state and federal sources. To assess the proportion of funding U.S. cities
receive from the federal government, we studied the financial statements of the 20
largest U.S. cities.
Nearly every city lumped their county, state and federal revenue together in a single line
item called intergovernmental revenue. Federal revenue alone is often not significant
enough to be represented as a single revenue source in a city’s financial statement.
Exhibit 1 shows the 20 largest U.S. cities and their proportions of intergovernmental
revenue as a percentage of total governmental revenue.
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Will Sanctuary Cities Suffer?
March 2017
Exhibit 1: Levels of Intergovernmental Revenue Vary by City
City
Phoenix, AZ
Philadelphia, PA
Intergovernmental
Revenue
($000s)
$821,127
Total Governmental
Revenue
($000s)
Intergovernmental
Revenue as a
% of Total Revenue
$2,082,594
39.4%
2,280,189
6,070,804
37.6%
21,966,162
82,564,626
26.6%
Indianapolis, IN
154,789
830,012
18.6%
Jacksonville, FL
256,336
1,414,070
18.1%
New York, NY
Charlotte, NC
166,463
929,764
17.9%
Houston, TX
377,546
2,946,326
12.8%
Chicago, IL
764,846
6,216,034
12.3%
Los Angeles, CA
860,867
7,196,204
12.0%
Denver, CO
213,643
1,850,323
11.5%
San Antonio, TX
198,307
1,742,329
11.4%
Seattle, WA
161,361
1,749,551
9.2%
El Paso, TX
40,915
526,348
7.8%
416,823
5,789,974
7.2%
61,403
894,472
6.9%
San Francisco, CA
Fort Worth, TX
Austin, TX
62,622
1,066,268
5.9%
San Jose, CA
81,133
1,452,368
5.6%
Columbus, OH
70,548
1,306,140
5.4%
San Diego, CA
44,529
1,978,832
2.3%
8,943
1,585,238
0.6%
Dallas, TX
Source: Most recent Comprehensive Annual Financial Reports for each of the 20 largest U.S. cities
Of the 20 largest U.S. cities, Phoenix, Arizona, relies most on intergovernmental revenue
at 39.4%. The average across all 20 cities is 13.5%. It’s important to remember that this
reflects any revenue sources from counties, states, federal agencies or other governments
other than the city itself. It is not just federally sourced revenue.
A partial cut in federal funding – given that most federal funding is prescribed by
law and therefore not subject to the executive order – is unlikely to affect a city’s
overall budget.
Consider Phoenix’s financial statements in more detail. Its statement of governmental
revenue and expenses didn’t explicitly detail the city’s reliance on federal funding.
However, a budget basis statement of operating funds included federal revenue amounts
for transit, community development, human services and other functions.
These funds amounted to 7.6% of Phoenix’s operating revenue for fiscal year 2015. All
of these functions appear to be mandated by law, and therefore exempt from President
Trump’s executive order. But even if we assume a 50% cut in federal funding, this would
result in just a 3.8% decrease in Phoenix’s overall revenue.
The Trump administration’s ability to affect city budgets appears to be quite limited,
absent widespread action by the U.S. Congress to open up the bulk of federal aid to U.S.
cities to presidential control.
2
Will Sanctuary Cities Suffer?
March 2017
State Governments Could Pressure Sanctuary Cities
We believe the federal government has limited ability to apply pressure to sanctuary
cities. But state governments may direct cities to comply with federal immigration
laws or reduce state funding to cities that fail to follow President Trump’s
immigration directives.
Following the 2016 election, 25 states have both a Republican governor and a
Republican controlled legislature. Two more states, North Carolina and West Virginia,
have Democratic governors but Republican legislatures with large enough majorities
to override their governors’ vetoes. Exhibit 2 shows the party that controls the state
governorships and legislatures of the 20 largest U.S. cities.
Exhibit 2: Which Party Controls the State Government?
City
Governor's Party
Legislative Majority
Phoenix, AZ
Republican
Republican
Indianapolis, IN
Jacksonville, FL
Houston, TX
San Antonio, TX
El Paso, TX
Fort Worth, TX
Austin, TX
Columbus, OH
Dallas, TX
Chicago, IL
Philadelphia, PA
Democrat
Democrat
Republican
Charlotte, NC
Los Angeles, CA
Democrat
San Francisco, CA
San Jose, CA
San Diego, CA
New York, NY
Divided
Denver, CO
Seattle, WA
Source: Ballotpedia
Ten cities are located in states where Republicans control the legislature and governor’s
office. And Charlotte, N.C., has a democratic governor, but the Republican majority
in the state legislature is sufficient to override the governor’s veto. These 11 cities could
come under fiscal pressure or other directive by their state governments related to federal
immigration policy.
Until these states begin to adopt any such legislation, it would be speculative to discuss
how it might affect these cities’ municipal budgets and the performance of their
municipal debt. Our municipal research staff will be monitoring any developments in the
months ahead.
3
MANY STATE GOVERNMENTS may
be more likely to direct cities to
comply with federal immigration
laws or reduce state funding to
cities that fail to follow President
Trump’s immigration directives.
Will Sanctuary Cities Suffer?
March 2017
Sanctuary Cities in Context
Federal funding to local governments is largely mandated by existing law, and therefore
not subject to withholding by the executive branch without new congressional
authorization. Further, to the extent federal funding is controlled by the executive
branch, it is unlikely to represent a meaningful amount of money compared to a city’s
overall budget.
We don’t expect moves by the Trump administration to restrict federal funding to
have much effect on U.S. cities or, by extension, their municipal bonds. To the extent
sanctuary cities may be under pressure, we believe it is much more likely to come from
state governments that can pass laws that supersede local government policies. The laws
may or may not have a financial effect on those communities. 
SOURCES
Comprehensive Annual Financial Reports for the 20 largest U.S. cities
“Executive Order: Enhancing Public Safety in the Interior of the United States,” whitehouse.gov,
January 25, 2017
This material is not intended to be a recommendation or investment advice, does not
constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The
information provided does not take into account the specific objectives or circumstances of any
particular investor, or suggest any specific course of action. Investment decisions should be
made based on an investor’s objectives and circumstances and in consultation with his or her
advisors.
Clients should contact their tax advisor regarding the suitability of tax-exempt investments in
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be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on state of
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of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or
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investment objectives, risk tolerance and liquidity needs before choosing an investment style
or manager.
This information represents the opinion of Nuveen Asset Management, LLC and is not intended
to be a forecast of future events and this is no guarantee of any future result. Information was
obtained from third party sources which we believe to be reliable but are not guaranteed as to
their accuracy or completeness. There is no assurance that an investment will provide positive
performance over any period of time.
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Investments, Inc.
© 2017 Nuveen Investments, Inc. All rights reserved.
Ballotpedia
U.S. Census Bureau
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income risk, including the possible loss of principal. The value of the portfolio will fluctuate
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